The great economic revolutions in history occur when new communication revolutions merge with new energy regimes. The communication technology becomes the means to manage the increased complexity, flow, and reach of economic activity made possible by the energy mix.

In the 19th century, print technology and public education gave rise to a print-literate work force with the communication skills to manage a coal powered, steam-driven, First Industrial Revolution. In the 20th century, the telephone, and later, radio and TV, became the communication media to manage the commercial life of the Second Industrial Revolution driven by oil, the automobile, and a mass consumer culture.

Today, the Internet is converging with renewable energies and becoming the communication media to manage a distributed and collaborative green economy. In the future, hundreds of millions of people will produce their own green energy in their homes, offices, and factories and share it with each other on an "energy internet," just like we now create and share information online. The creation of a renewable energy regime, loaded by buildings, partially stored in the form of hydrogen, distributed via an energy internet, and connected to plug-in zero emission transport, establishes the essential five pillars of a Third Industrial Revolution infrastructure. The forty year build-out will create thousands of businesses and millions of jobs and usher in a fundamental reordering of human relationships— from hierarchical power to lateral power— that will impact the way we conduct commerce, govern society, educate our children, and engage in civic life.

Like every other economic revolution that preceded it, The Third Industrial will recast many of our assumptions about how the world works. Nowhere has the shift in economic thinking become more evident than when it comes to the paramount question of defining what we mean by "wealth." Adam Smith, Jean-Baptiste Say, and the other early architects of capitalism fetishized the importance of wealth creation in the formation of capital. The idea of accumulating past wealth and using it in the form of capital to centralize control over the technological modes of production and distribution was a radical new idea at the dawn of the market era. Armed with this new tool called "capital," the early theorists built a conceptual model that has remained with us until the present day. Believing that capital is the catalyzing force of all economic activity, the economists assumed that amassing wealth could provide an ever larger pool of capital, which, if properly invested in new technologies, goods, and services, in an unfettered marketplace, would continue to create more wealth which would generate more capital, leading to an ever expanding economic pie.

Now, on the cusp of a new Third Industrial Revolution, a new generation of scholars are beginning to mount a significant challenge to the conventional notion of the nature of wealth and role of capital in the economic process. The result is that much of economics, as it is taught today, will become increasingly irrelevant in explaining the past, understanding the present, and forecasting the future.

Although the term paradigm shift has been grossly overused in recent years, I think it's apt when it comes to economic theory. Our children's understanding of economic theory and the assumptions of economic practice will be as radically different from ours as the market theorists' ideas are from the "just price" philosophy that governed late medieval commerce and trade.

How Adam Smith Got it Wrong In their attempts to understand the new forces let loose by coal-powered steam technology and factory production, the founding fathers of the new discipline—Adam Smith, Jean-Baptiste Say, and the like—looked to the field of Newtonian physics for guiding principles and metaphors to fashion their own theories of the workings of the marketplace.

The Enlightenment philosophers argued that just as the universe, once set in motion, acts automatically like a well-balanced mechanical clock, so too does the marketplace. While God is the prime mover of the universe, man's innate competitive self-interest is the prime mover of the marketplace. And, just as the laws of gravity govern the universe, an invisible hand rules over the affairs of the marketplace. Picking up on Newton's observation that "for every action there is an equal and opposite reaction," Smith and others argued that the self-regulating market operated in the same fashion, with supply and demand continually reacting and readjusting to one another. If consumers' demand for goods and services goes up, sellers will raise their prices accordingly. If the sellers' price becomes too high, demand will slacken, forcing the sellers to lower the price to spur demand.

The problem with using Newton's mechanics to understand the market is that his physics tell us only about speed and location. Newton's laws of matter in motion don't really help us understand much about how economic activity operates, and are a thin reed by which to anchor the entire discipline. In fact, they actually give us a false sense of how economic activity unfolds because they don't take into consideration the passage of time and the irreversibility of events. In Newton's cosmology, all mechanical processes are, in theory, reversible. For every +T there must be a –T in Newtonian mathematics. Take, for example, billiard balls bumping up against each other on the table. In Newtonian physics, any action on the table is theoretically reversible because the laws of matter in motion make no allowance for the passage of time. But real economic activity is all about the irreversibility of events—how energy and material resources are harnessed, transformed, utilized, used up, and discarded.

Why the Energy Laws Govern all Economic Activity It wasn't until the second half of the nineteenth century, when physicists articulated the first and second laws of thermodynamics—the energy laws—that economists had a scientific basis to accurately describe economic activity. But by that time, economic philosophy was so mired in Newtonian mechanical metaphors that its practitioners were unable to part with these theories, even though they were based on scientific assumptions that were largely inapplicable to economic practice.

The first and second laws of thermodynamics state that "the total energy content of the universe is constant, and the total entropy is continually increasing." The first law, the "conservation law," posits that energy can't be created or destroyed—that the amount of energy in the universe has remained the same since the beginning of time and will be until the end of time. While the energy remains fixed, it is continually changing form, but only in one direction, from available to unavailable. This is where the second law of thermodynamics comes into play. According to the second law, energy always flows from hot to cold, concentrated to dispersed, ordered to disordered.

To understand how these laws work in the real world, think about burning a chunk of coal. None of the energy that was contained in the coal is ever lost. Rather, it is transformed into carbon dioxide, sulfur dioxide, and other gases that are dispersed into the atmosphere. Although the energy remains, we can never reconstitute the dispersed energies back into the original piece of coal to use it again. Rudolph Clausius, a German scientist, coined the term entropy in 1868 to refer to energy that is no longer usable. The question that comes immediately to mind is "Why can't all of the dispersed energy be recycled?" Some of it can, but it would require using additional energy in the recycling process. That energy, when harnessed, increases the overall entropy.

Even though the transformation of energy, in all of its various forms, is the very basis of all economic activity, only a tiny fraction of economists have even studied thermodynamics. The economists' ignorance of the laws of energy has lead to a fundamental misunderstanding of the nature of wealth. John Locke, the English Enlightenment philosopher, argued that "land that is left wholly to nature . . . is called, as indeed it is, waste." Locke turned the second law of thermodynamics on its head by proclaiming that nature itself is useless and only becomes of value when human beings apply their labor to it, transforming it into productive assets.

The laws of thermodynamics tell us something quite different. Economic activity is merely borrowing low-entropy energy inputs from the environment and transforming them into temporary products and services of value. In the transformation process, often more energy is expended and lost to the environment than is embedded in the particular good or service being produced.

Despite the incontrovertible fact that all economic activity creates only temporary value, at the expense of degrading the resource base on which it depends, most economists don't look at the economic process from a thermodynamic perspective. Enlightenment philosophers, with the exception of Thomas Malthus, came to believe that the pursuit of economic activity is a linear process that invariably leads to unlimited material progress on Earth, if only the market mechanism is left uninhibited so that the "invisible hand" can regulate supply and demand. The very idea that an acceleration of economic activity might result in a degraded environment and a dark future for unborn generations would have been unfathomable.

The reason most economists just don't get it is that they fail to understand that all economic activity is borrowing against nature's energy and material reserves. If that borrowing draws down nature's bounty faster than the biosphere can recycle the waste and replenish the stock, the accumulation of entropic debt will eventually collapse whatever economic regime is harnessing the resources.

Every economic era is marked by the introduction of a new energy regime. In the beginning, the extraction, processing, and distribution of the new energy are expensive. Technological advances and economies of scale reduce the costs and increase the energy flow until the once-abundant energy becomes increasingly scarce and the entropy bill from past energy conversion begins to accumulate. The oil era followed this curve over the course of the twentieth century, peaking in 2006.

While there is a fractious debate going on around the world about our debt-ridden culture and the need to live within our means, there is little serious attention directed to the ultimate debt we have incurred over the course of the First and Second Industrial Revolutions as a result of our profligate consumption patterns—our debt to the earth's biosphere. Climate change is the entropy bill— the planetary debt— for two centuries of burning fossil fuels to propel the First and Second Industrial Revolutions. What we thought was a growing store of accumulated societal wealth was really only the momentary enjoyment of goods and services made possible by the burning of vast amounts of fossil fuels and the release of carbon dioxide into the earth's atmosphere. Learning to live within the earth's budgetary restraints by not consuming nature's endowment faster than the biosphere can recycle the waste and replenish the stock is the ultimate test of our species' ability to live within the planet's carrying capacity. This is what sustainable economic development is really all about.

What, then, are we to conclude about the nature of gross domestic product (GDP)? We think of GDP as a measure of the wealth that a country generates each year. But from a thermodynamic point of view, it is more a measure of the temporary energy value embedded in the goods and services produced at the expense of the diminution of the available energy reserves and an accumulation of entropic waste. Since even the goods and services we produce eventually become part of the entropy stream, for all of our notions of economic progress, the economic ledger will always end up in the red. That is, when all is said and done, every civilization inevitably ends up sucking more order out of the surrounding environment than it ever creates and leaves the Earth more impoverished. Seen in this way, the gross domestic product is more accurately the gross domestic cost, since every time resources are consumed, a portion becomes unavailable for future use.

The changes taking place in how we measure and understand wealth creation are so profoundly disruptive to the way we have thought over the past two hundred years that spawned the first two industrial revolutions, it is likely that much of the classical and neoclassical economic theory that accompanied and legitimized these two earlier industrial eras will not survive the newly emerging economic paradigm.

I suspect that in the years ahead the still-valuable insights and content of standard economic theory will be rethought and reworked within the purview of a thermodynamic lens. Using the laws of energy as a common language will allow economists to enter into a deep conversation with physicists, engineers, chemists, ecologists, biologists, architects, and urban planners, among others, whose disciplines are grounded in the laws of energy. Since these other fields are the ones that actually produce economic activity, a serious interdisciplinary discussion over time could potentially lead to a new synthesis between economic theory and commercial practice and the emergence of a new, explanatory economic model to accompany the Third Industrial Revolution paradigm.

Reconceptualizing economic theory is no longer merely an interesting intellectual exercise, but an urgent task if we are to develop the appropriate tools to expedite our transition into a post-carbon future.

Jeremy Rifkin is the author of The Third Industrial Revolution: How Lateral Power is Transforming Energy, the Economy, and World.